Which economic indicators are most important?

Do you know what happened to last quarter's GDP? How about this month's CPI? Or last month's PPI?

If you find all these initials a bit confusing, you're not alone. You've probably heard them before, but what do they mean?

Actually, they're abbreviations for various economic indicators and professional market-watchers pay a lot of attention to them.

As an individual investor, you too may be interested in learning more about these signs.

Let's take a look at some of the most widely followed indicators:

Employment Report

The monthly Employment Report shows how many jobs the economy is adding and how much workers are getting paid. This report is watched extremely closely by the Federal Reserve Board.

If the report indicates a shrinking pool of available workers and a corresponding rise in wages, then the Federal Reserve becomes concerned that businesses will raise prices to offset the higher wages thus setting in motion an "Inflationary spiral."

Consumer Price Index

The CPI, released in the middle of each month, measures prices paid by consumers for retail goods and services. The CPI is the most closely watched inflation indicator; when it is higher or lower than predicted, it can quickly and strongly affect the market.

Producer Price Index

The PPI, released each month a day or two ahead of the CPI, measures the price of goods and services at the wholesale level. Economists track the PPI closely, because it can often foretell inflation in consumer prices.

Employment Cost Index

The ECI, issued quarterly, measures the wages and benefits for hourly and salaried workers. The ECI is considered the most comprehensive report on employment costs and, as such, is an important indicator of wage inflation.

Gross Domestic Product

The GDP measures the total output of goods and services produced in the United States for a given quarter. Basically, the quarterly GDP report shows the rate of economic growth. A robust GDP is good in the sense that more production increases Americans' overall wealth. On the other hand, a too-strong GDP can mean that the economy may be speeding out of control, signaling a rise in inflation. Many economists now say we can comfortably sustain an annual GDP of 3.75%, or even slightly higher.

To really appreciate the impact of these reports, you have to look at more than just the monthly or quarterly numbers. What really matters, from an investor's point of view, is how these numbers match up with Wall Street's expectations. For example, a CPI that comes in much higher than expected could jolt the stock market at least in the short term.

But in the long term which is the most important time frame for the majority of individual investors you need to focus on the trends. A single report can be just a "blip" on the screen, but a series of reports indicating a significant rise in inflation could have a more sustained impact on the markets.

So the next time you see all those strange-looking abbreviations on the financial pages of your newspaper, take the time to look them over. They've got an interesting story to tell.

(Betty J. Neal, CFP, is an investment representative with Edward Jones in Springfield.)